When can estoppel defeat reliance on a contractual time bar?

In the recent decision of Valmont Interiors Pty Ltd v. Giorgio Armani Australia Pty Ltd (No. 2)[1], the New South Wales Court of Appeal considered the circumstances in which an estoppel will operate to preclude an employer from relying on a contractual time bar to defeat a contractor’s variation claim.

Estoppel by conduct arises where a party induces another party by its conduct to adopt an assumed state of affairs and the other party acts on this assumption to its detriment. In such circumstances, the party that induced the assumption is prevented from resiling from its conduct.

The decision reinforces that in certain factual circumstances, the Australian courts will hold that an estoppel will arise and defeat an otherwise valid contractual time bar.

Background

The background facts were as follows:

• Valmont Interiors Pty Ltd (Valmont) entered into a contract with Giorgio Armani Australia Pty Ltd (Armani) for Valmont to provide construction and fit-out works for a new Emporio Armani store at Sydney Airport.
• The contract specified that the joinery was to be supplied by Armani.
• The third party that Armani had engaged to supply the joinery subsequently informed Armani that it could not supply the required items.
• Armani directed Valmont to supply those items of joinery which the third party was not able to supply. This direction did not purport to be a formal variation under the contractual variation provision.
• Throughout the performance of the works, the parties exchanged correspondence regarding variations claimed by Valmont, including variations relating to a change of the façade design.This correspondence included an email dated 11 April 2016 from a representative of Armani to Valmont’s representative which stated that “there are no variations on this project”.
• The variations the subject of the communications between the parties did not relate to joinery.
• Armani refused to pay for the joinery works on the basis that Valmont had not complied with the notification procedure for variations and claimed that it was thereby released of any claims by Valmont in relation to the joinery.

Valmont commenced proceedings in the District Court of New South Wales seeking payment for work performed pursuant to the contract and outside of the scope of the contract.

The District Court judgment

At first instance, the court held that Valmont was entitled to recover the costs for additional works incurred prior to 11 April 2016 (notwithstanding Valmont’s failure to comply with the notification procedure for variations), but that following Valmont receiving the email of 11 April 2016, it was not entitled to assume that it would be paid for additional works without fulfilling the contract’s notice requirements.

In other words, estoppel applied up until 11 April 2016 but after 11 April 2016, the estoppel came to an “abrupt halt”.

Because his Honour found that the joinery work was “almost exclusively performed after 11 April 2016” (when the estoppel had ceased to operate), Valmont was not entitled to payment for the joinery work on account of its failure to comply with the contract’s notice requirements.

The Court of Appeal judgment

In contrast, the Court of Appeal held that the estoppel continued to operate to prevent reliance upon the time bar in the variation provision after 11 April 2016. Estoppel did not come to an “abrupt halt” as at that date and accordingly it was not necessary to determine when the work in relation to the joinery was undertaken.

The court found that Armani, by directing Valmont to perform the additional joinery works, had induced Valmont to rely on an assumption that it would be compensated for the joinery costs. In order for this assumption to be displaced, it was held that any “material change” in relation to the assumption needed to be communicated by Armani to Valmont in sufficiently clear terms, and it was incumbent upon Armani to do so had it been Armani’s intention to not pay for the joinery.

Armani did not make it clear to Valmont either expressly, or implicitly, that the assumption that Valmont had come to rely upon (i.e. that it would be paid for the joinery works) had been displaced. The communications between the parties (including the email from Armani dated 11 April 2016) regarding variation works did not relate to the topic of joinery.

The court also found that Valmont had suffered irreversible detriment because as at 11 April 2016, it was too late contractually to issue a notice in compliance with the variation clause.

Implications

Time bars are commonly included in construction contracts for the protection of the employer. While employer’s may seem to overlook technical non-compliances while a project is on track, any such non-compliance is frequently relied on if the parties end up in a dispute.

The issue may arise where an employer has approved variation claims throughout the course of a construction project without insisting on strict contractual compliance with notice/time bar requirements. If this is permitted on a one-off basis, the employer may be able to protect its position by clearly communicating that the contractor’s non-compliance is permitted only on the occasion in question. However, if the non-compliance has been tolerated on an ongoing basis, this case serves as a stark reminder that if the employer subsequently determines it will enforce strict compliance moving forward, it ought to provide clear written notice of the need for future compliance to the contractor.

[1] [2021] NSWCA 93